Good day, and welcome to the Southern Missouri Bancorp Quarterly Earnings Conference Call. . Please note, today's event is being recorded. I'd now like to turn the conference over to Matt Funke, Chief Financial Officer. Please go ahead, sir.

Thank you, Rocco. Good afternoon, everyone. This is Matt Funke, CFO with Southern Missouri Bancorp. The purpose of this call is to review the information and data presented in our quarterly earnings release dated Monday, July 26, 2021 and to take your questions. We may make certain forward-looking statements during today's call, and we refer you to our cautionary statement regarding forward-looking statements contained in the press release. I'm joined on the call today by Greg Steffens, our President and CEO. So thank you to all for joining us. Greg is going to lead off our conversation today with some commentary on our current operations, our lending activity and credit quality measures. Greg?

Thank you, Matt, and good afternoon, everyone. Again, I'm Greg Steffens, and I thank you for joining us. I'm going to start off with just a brief COVID update. Since our last call, we've seen most of our market areas reporting a fairly significant increase in COVID transmissions, and we understand from our public health authorities that this is largely attributed to what they're referring to as the Delta variant. To date, we are not seeing renewed business activity restrictions in our primary markets. But unfortunately, we've seen an uptick in cases within our team members and just our general communities. And we have had to move some of our locations to drive-through-only service for short periods of time. Moving on to credit. We remain quite positive about our credit portfolio and borrower performance. At June 30, we saw a further reduction in the balance of modifications under the CARES Act. All of those loans that have been modified are now requiring at least interest-only payments, and nearly all of the dollars on loans to borrowers are in the hotel industry. We continue to analyze this portfolio closely, and through June, we have continued to see steady improvement for most of our borrowers and underlying properties. We're hopeful that they won't be impacted significantly by the current increase in COVID cases in our area, but it does remain a risk that we are monitoring. Moving to PPP. Our forgiveness has picked up in the latter parts of the June quarter. The release notes that we received $37.5 million in PPP forgiveness during the June quarter, down a little bit from $42 million in the March quarter. At June 30, we had $63 million in PPP loans remaining outstanding, of which $13 million were from the first round and $50 million were from the second round of PPP loans. We're currently expecting from $25 million to $30 million in additional forgiveness during the September quarter, which would probably hold the accelerated appreciation -- excuse me, accretion of origination fees at a similar level to those of the June quarter, based on the average fee for the second round loans being a higher percentage and a little larger than those in the first round. We hope to have most of the first round of PPP forgiveness completed by the end of August. We noted in the release that our nonperforming loans moved lower again during the June quarter. Adversely classified loans moved lower as well, dropping to $18.1 million. And our past due loans were at a level we're very proud of at totaling only $3.8 million, which is 18 basis points of our total loans outstanding.

Thanks, Greg. We earned $1.53 diluted in the June quarter, that's the fourth quarter of our fiscal year, and that figure is up $0.26 from the linked March quarter. It's also up $0.77 from the $0.76 diluted that we earned in the June 2020 quarter. The improvement from a year ago is primarily attributable to the swing from a relatively large provision for loan losses in the year ago period to a negative provision in the current period. Additionally, a year ago, we had significant M&A charges.

Thanks, Matt. I want to wrap up talking a little bit about growth. Loan growth finished the year on a strong note in the June quarter. Seasonal lag draws that we had discussed earlier were helpful, as was retention this quarter of about $14 million of residential mortgages that we normally would have sold in the secondary market. Our largest category of growth in the quarter was multifamily, which grew $48 million. And we also saw construction draws that were related to multifamily. Our West region was the largest contributor to our quarterly growth, while the South region was a leader for the fiscal year. Our outlook for the September quarter also remained strong, as our pipeline for loans to fund within the next 90 days was $141 million at June 30, similar to where we were at March 31 and about 60% higher than at the same time last year. We do expect this to be somewhat seasonal, and we wouldn't look to the pace to continue for the fiscal year '22. We're budgeting for about 4% growth outside of PPP forgiveness. So we are expecting growth to decline in the latter parts of the year. One other factor that we have seen recently is we've seen a drop in prepayment rates. And those drops, we don't know if those will continue to stabilize or where prepayment rates will go from here, but that did contribute to growth over the last quarter. Our nonowner CRE concentrations was approximately 272% of regulatory capital at June 30 as compared to 262% at March 31 and down from 280% 1 year ago. In the current quarter, our loan growth in relevant categories, especially multifamily, outpaced our consolidated capital growth. Our volume of loan originations was $286 million in the June quarter, which remained elevated as compared to $251 million in the March quarter, but down from $310 million in the June quarter of a year ago, which is when the bulk of our PPP loans were funded. For the fiscal year, we originated $972 million in loans, which is up from $848 million last year. Outside of PPP, those originations would have been $912 million versus $711 million, respectively. On the M&A front, we are seeing considerably more opportunities of late and have had more in-depth discussions and have several bids outstanding. We're more optimistic than when we spoke last quarter about our chances of putting something together in the relatively near future.

Thanks, Greg. And Rocco, at this time, we're ready to take questions from our participants. So if you would, please remind folks how they can queue for questions at this time.

. Today's first question comes from Andrew Liesch with Piper Sandler.

I just wanted to talk about the loan pipeline here, comparable level to last quarter. What's the mix of it? I mean how much is residential, how much is multifamily? Is that much different from a quarter ago?

It's really pretty similar to where we were last quarter. It continues to have a lot of multifamily in it. The level of residential loans in the portfolio pipeline have dropped some, as we anticipate seeing a drop off in secondary market originations. So we have a pretty good pipeline, and we're pretty happy to have it at this point.

Got it. Great. And then on the roughly 7 basis points of core margin expansion, how should we be looking about that trending from here? With the loan growth that you guys had in the quarter, I mean presumably, you could have an improved earning asset mix as we move into the next fiscal year. So how do you think that margin can trend?

Yes. We're optimistic in the near term. Cash ought to make up a lower percentage of the average earning assets for the next couple of quarters, we're hopeful. And we'll see asset yields continue to come down, but we've got a little bit of room left on the cost of funds, too. So we're reasonably optimistic for the next couple of quarters.

Our next question today comes from Kelly Motta with KBW.

This is Matt Reich stepping in for Kelly Motta. Just one question about the provision and the reserve level. Do you guys have a target reserve level? And if it's below where it is now, do you see yourselves just trying to grow into that reserve or releasing more in the future?

We always want to be conservative as we are releasing, but we've got to follow GAAP too. Really, where the level is now is appropriate based on what the economic conditions were that we modeled through the software at June 30. If we continue to see economic stabilization, we're hopeful that maybe that can trend lower, but no one target in mind there.

. Our next question comes from David Cohen , a Private Investor.

I just want to -- I do have a couple of questions, but I just want to congratulate you on another great quarter and another great year. Congratulate not only to you but your entire team. If you could do me a favor here and maybe talk to me about the preventative measures that Southern Missouri has taken toward hacking, against some of these thieves from Russia or wherever, and what can you do to protect the bank against that?

We provide -- we have third parties that are continually trying to access our system to test what defenses we have in place, and we have testing done on a quarterly basis. And we're continuing to add updates. We have a variety of security protocols and testing that we provide all of our team members. And we have training on security every quarter as well. And then our regulatory friends come in and they look at security on a regular basis as well. And we feel like we are as well secured as we can. In addition, we carry a lot of cyber liability coverage.

Good. Also, can you give me an idea about how successful your mobile banking app is? Have customers adopted that significantly?

We are continuing to see more and more adoption all the time. Our quarterly numbers continue to trend higher every quarter on mobile deposits and utilization. The advent of COVID increased a lot of the mobile activity quite a bit, and it just continued to increase over time. And we would anticipate that to continue to grow.

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Okay. Well, thank you again, everyone. We appreciate your interest in Southern Missouri and your time today, and we'll talk with you again in 3 months.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Thank you.